How the end of QE will affect asset prices

Following the financial crisis, central banks bought trillions of dollars worth of financial assets - mostly bonds - to pump up their economies. But if that quantitative easing pushed asset prices up, will the end of QE mean asset prices will fall?

Transcript

In the wake of the financial crisis, central banks in the US, Europe, and Japan crammed their economies with cash by buying financial assets, mostly bonds, to the tune of $15 trillion. As the money supply expanded, so did share prices.

Now that the global economy appears to be well on its feet, QE is winding down. So if QE got asset prices up, shouldn't the end of QE mean that asset prices will fall? All else being equal, yes, it should. And the markets mini-crash in February seems to bear out this idea.

The market has recovered somewhat, but intraday volatility remains elevated. Something has changed.

If the end of QE does bring about a correction, which assets will be hit the hardest? Hard to say. But if interest rates rise, companies with low earnings now but high hopes for profits down the road could be hit the hardest. So holders of, say, Netflix or Snap may want to rebalance their portfolios.

The unfortunate thing about markets, of course, is that all things are never equal. Indeed, this is what central bankers and most everyone else are piously hoping. That strong growth and earnings could outweigh the fact that cash is being pulled out of the economy.

Yet, if that growth brings about increased wages, inflation, and interest rates at the same time as QE is winding down, asset prices could fall very sharply indeed.

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